Financial Accounting in An Economic Context 10th Edition Pratt Test Bank

Financial Accounting in an Economic
Context 10th Edition Pratt Test Bank

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Chapter 7
Merchandise Inventory
MULTIPLE CHOICE QUESTIONS
1. Portland Supplies Co. mistakenly excluded $3,000 of goods from its December 31, 2016
physical inventory count. Its December 31, 2017 inventory amount was correct. As a
result of this error,
a. 2016 income is overstated by $3,000.
b. 2016 ending inventory is overstated by $3,000.
c. 2017 income is overstated by $3,000.
d. 2017 cost of goods sold is overstated by $3,000.
Ans: C LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

AICPA BB: Critical Thinking AICPA FC: Reporting
2. Which one of the following expenditures should not be included in the cost of inventory?
a. Transportation-out
b. Purchase cost
c. Packaging cost
d. Transportation-in
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

AICPA BB: Critical Thinking AICPA FC: Measurement
3. Michael Manufacturers fraudulently overstated its December 31, 2016 and December
31, 2017 inventory by $3,000 and $6,000, respectively. As a result of these
overstatements,
a. 2016 income is overstated by $3,000 and 2017 income is overstated by $3,000.
b. 2016 income is overstated by $3,000 and 2017 income is overstated by $6,000.
c. 2016 income is overstated by $3,000 and 2017 income is accurate.
d. 2016 and 2017 incomes are not affected.
Solution: 2016 overstatement = $6,000 - $3,000 = $3,000
Ans: A LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

7-1
7-2 Test Bank – Chapter 7 – Merchandise Inventory
4. Jackson Roper fraudulently overstated its December 31, 2016 inventory by $8,000. As a
result of this overstatement,
a. the 2016 earnings per share is overstated.
b. the 2016 current ratio is understated.
c. the 2016 cost of goods sold amount is overstated.
d. net income is overstated for 2017, and net income for 2016 is correct.

5. If a company desires to increase its inventory, then it should:

a. sell more goods than it purchases during the period.
b. purchase more goods than it sells during the period.
c. purchase the same amount of goods that it sells.
d. increase its selling prices to a level that customers would not be willing to purchase.
Ans: B LO 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

6. Cagey Trading Inc. counted $2,000 of inventory twice during its December 31, 2016
physical inventory count. Its December 31, 2017 inventory amount is correct. As a result
of this error,
a. 2016 ending inventory is overstated by $2,000.
b. 2016 income is understated by $2,000.
c. 2017 income is overstated by $2,000.
d. 2017 cost of goods sold is understated by $2,000.

7. Washington Co. mistakenly omitted $4,000 of merchandise from its inventory on

December 31, 2016. Its December 31, 2017, inventory is correct. As a result of this
error,
a. earnings per share is overstated for 2016 and overstated for 2017.
b. total income for 2016 and 2017 combined is correct.
c. the current ratio is overstated on December 31, 2016 and is correct on December 31,
2017.
d. ending inventory is understated at December 31, 2017.
Ans: B LO 1 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

Test Bank – Chapter 7 – Merchandise Inventory 7-3
8. Parker Books purchased 200 books, paying $10 each. Parker paid the $40 shipping
costs and $30 binding repair fees so that those books could be sold. How much is the
cost of inventory?
a. $2,000
b. $2,040
c. $2,030
d. $2,070
Solution: (200 X $10) + $40 + $30
Ans: D LO 2 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

9. A company deliberately and inappropriately included interest costs in its December 31

inventory. Which one of the following statements is true for the company’s December 31
financial statements?
a. Earnings per share is understated.
b. Inventory turnover ratio is understated.
c. The current ratio is understated.
d. Cost of goods sold is overstated.
Ans: B LO 2 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

10. Dole Produce Ltd. counted $700 of inventory twice in its December 31, 2016 inventory.
On December 31, 2017, it mistakenly omitted $200 of merchandise from its inventory. As
a result of these errors:
a. net income is overstated by $700 in 2016 and understated by $200 in 2017.
b. net income in understated by $700 in 2016 and overstated by $200 in 2017.
c. net income is overstated by $700 in 2016 and understated by $900 in 2017.
d. total net income for 2016 and 2017 is correct.
Solution: 2017 understatement = -$700 - $200 = - $900
Ans: C LO 1 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

11. Kemp Clothing has cost of goods sold of $14,000 with beginning and ending inventories
of $4,000 and $2,000, respectively. Purchases during the period are:
a. $ 8,000.
b. $ 9,000.
c. $10,000.
d. $12,000.
Solution: $14,000 + $2,000 − $4,000 = $12,000

12. Which one of the following expenditures should not be included in the cost of inventory?
a. Purchase cost
b. Transportation-in
c. Packaging cost
d. Capitalized equipment cost
Ans: D LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

13. Mars Hardware sold 20 drills for $8 each. Each drill cost $4. Which journal entry
completely records the sale under a perpetual inventory system?
a. Cash 160
Sales 160
b. Cash 160
Inventory 160
c. Cash 160
Cost of Goods Sold 80
Sales 160
Inventory 80
d. Cash 160
Inventory 80
Gain from Sale 80
Solution: Sales = 20 X $8 = $160; CGS = 20 X $4 = $80
Ans: C LO 3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: Analytic

14. Wood Inc. sells automobiles at $6,000 above cost and uses the specific identification
method for inventory. Below are the cars and the costs Wood paid for the inventory
before the sale.
Auto 1: $35,000
Auto 2: $17,500
Auto 3: $19,500
Auto 4: $23,000
Auto 5: $26,000
If Wood sells Auto 3 and Auto 5 for cash, which of the following would be included in the
journal entries it uses to record the sale and recognize the cost of the inventory?
a. A debit to Cost of Goods Sold for $45,500.
b. A credit to Sales for $45,500.
c. A credit to Inventory for $57,500.
d. A credit to Sales for $12,000.
Solution: CGS = $19,500 + $26,000 = $45,500
Ans: A LO 3, 4 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

15. Vic’s Produce purchased 50 boxes of tomatoes for a total of $400. It paid $20 for
shipping tomatoes to a customer and $15 for repackaging them into smaller boxes. The
cost of these tomatoes is:
a. $400.
b. $420.
c. $415.
d. $435.
Solution: $400 + $15 = $415

16. Simon Cereal purchased 100 pounds of cornflakes for $100. Transportation cost to
Simon’s production facility was $25 for the barrel of cornflakes shipped FOB destination.
Simon paid $60 for 100 one-pound biodegradable plastic bags into which the cornflakes
were placed. The cost of each one-pound bag of cornflakes is:
a. $1.00.
b. $1.25.
c. $1.60.
d. $1.75.
Solution: ($100 + $60) / 100 = $1.60

17. Beginning inventory is valued at $7,000, purchases are $15,000 and ending inventory is
valued at $9,000. Cost of goods sold is:
a. $23,000.
b. $16,000.
c. $30,000.
d. $13,000.
Solution: $7,000 + $15,000 - $9,000 = $13,000

18. Victoria Fashions Clothing Store uses the perpetual method of accounting for inventory.
During the current year, purchases are $30,000 and cost of goods sold is $25,000.
Beginning inventory is valued at $4,000 and ending inventory was taken on December
31 and valued at $6,000. Inventory shortage expense for the current year is:
a. $0.
b. $2,000.
c. $3,000.
d. $5,000.
Solution: ($30,000 + $4,000 - $25,000) - $6,000 = $3,000
Ans: C LO 3 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

19. During a year of decreasing prices and decreasing inventory, which cost flow
assumption would measure the greatest net income?
a. FIFO
b. LIFO
c. Average
d. Both a and c are correct.

20. During a year of rising prices and increasing inventory, which cost flow assumption
would yield the greatest current ratio?
a. Average
b. LIFO
c. FIFO
d. Both a and c are correct.
Ans: C LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

would measure the smallest net income?
a. LIFO
b. FIFO
c. Average
d. All methods measure income the same.
Ans: A LO 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

would measure the smallest working capital ratio?
a. FIFO
b. LIFO
c. Average
d. Working capital is not sensitive to inventory cost flow assumptions.
Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

23. The President and CEO of Quinn Manufacturing receives a cash bonus equal to 1% of
audited net income during the current year. During a period of rising prices and
increasing inventory, which inventory cost flow assumption would measure the smallest
compensation expense and greatest cash position for Quinn Manufacturing?
a. FIFO
b. NIFO
c. Average
d. LIFO
Ans: D LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

24. Unusually high income resulted when Vincent Inc. cut back its inventory levels. This
effect is:
a. backed by the LIFO elimination rule.
b. expected in most industries.
c. achieved through using the lower-of-cost-or-market rule.
d. called LIFO liquidation.

would measure the largest inventory turnover ratio?
a. FIFO
b. LIFO
c. Average
d. The inventory turnover ratio is not sensitive to inventory cost flow assumptions.

26. During a period of rising prices and increasing inventory, which cost flow assumption
used on both federal income tax returns and financial reports would provide a company
with the greatest cash position?
a. FIFO
b. LIFO
c. Average
d. TIFO

27. During a year of falling prices, which cost flow assumption would measure the strongest
cash flow position?
a. LIFO
b. FIFO
c. Average
d. Net income will remain the same under all methods.

28. During a year of falling prices, which cost flow assumption would yield the greatest
current ratio?
a. FIFO
b. LIFO
c. Average
d. Lower-of-cost or market

29. If a company uses the LIFO cost flow assumption on its federal income tax return in
order to minimize its tax payment, then it:
a. must use LIFO on its financial statements.
b. must use FIFO on its financial statements.
c. may use any cost flow assumption permitted by GAAP on its financial statements.
d. must correct the error at the beginning of the next accounting period.
Ans: A LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

30. An excessively low inventory turnover ratio may reveal that:

a. customers are delaying their payments on account.
b. the selling price of inventory is too high.
c. sales returns have decreased significantly.
d. the company is selling too much inventory.

31. Carmelo Inc. has Cost of Goods Sold of $45,000 (beginning inventory of $10,000, plus
purchases of $55,000, less ending inventory of $20,000). Inventory turnover is
a. 2.3
b. 3.0
c. 3.7
d. 4.5
Solution: ($10,000 +$20,000)/2 = $15,000; $45,000/$15,000 = 3.0
Ans: B LO 6 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

32. Under generally accepted accounting principles, a company can choose a cost flow
assumption for valuing cost of goods sold that can result in different income reporting.
However, it can’t frequently change the cost flow assumption adopted in order to
measure the highest income possible because of the:
a. conservatism principle.
b. going concern principle.
c. stable-dollar principle.
d. consistency principle.

33. During an extended period of constant prices, which cost flow assumption would
generally measure the largest earnings per share?
a. FIFO
b. LIFO
c. Weighted average
d. All of the above assumptions would result in equal earnings per share during an
extended period of constant prices.

34. At which point in accounting for inventory in a perpetual system is determining the cost
of goods sold amount an issue?
a. When the inventory is acquired.
b. As the inventory is carried in the warehouse and held for sale.
c. As the ending inventory is counted.
d. As the inventory is sold.

35. Items should be included in the company’s inventory if they are:

a. being used in the production of income.
b. held in anticipation of an increase in value.
c. being held for sale.
d. sold during the period.
Ans: C LO 2 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic

36. Which one of the following should be included in Camden’s inventory at December 31,
2017?
a. Goods shipped FOB shipping point on December 31, 2017, from Camden to a
customer.
b. Goods in the Camden’s warehouse on December 31, 2017, waiting to be shipped to
a customer.
c. Goods ordered from one of Camden’s suppliers on December 31, 2017, shipped
FOB destination on December 31, 2017, which arrived January 2, 2018.
d. Goods sold and shipped to a customer on December 30, 2017, terms FOB
destination, which were delivered on December 31, 2017.

37. Which one of the following companies would likely carry the largest percentage of
inventory as compared to its other assets?
a. Ernst & Young, CPAs
b. Merrill Lynch Investment Brokers
c. The Magic Kingdom at Disney World
d. Jim’s Ford Dealership

38. When prices remain the same, which cost flow assumption would generally measure the
largest current ratio?
a. FIFO
b. LIFO
c. Average
d. All of the above assumptions would result in equal current ratios during an extended
period of constant prices.

39. When accounting for inventory consignments, the issue which helps determine whether
or not the inventory cost should be included on a company’s balance sheet is:
a. whether the inventory is physically located in the company’s warehouse.
b. who actually owns title to the inventory.
c. who will ultimately sell the inventory to the consumer.
d. when the inventory will be sold.

40. Specific identification is a method of accounting for inventory:

a. which eliminates the need for tracking the cost of inventory items.
b. that allocates the oldest cost to the first units sold.
c. that often allows a manager to manipulate net income and the ending inventory
value.
d. commonly used in periods of rising prices.

41. Selecting an inventory cost flow assumption will most likely be impacted by which one of
the following?
a. The physical flow of the inventory goods.
b. The cost of the company’s plant and equipment.
c. Income taxes.
d. The cost flow assumptions most often used by other companies.
Ans: C LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

42. All of the following are typically associated with Japanese business inventory accounting
except:
a. the use of the average assumption for inventory cost.
b. shared business risks.
c. slow inventory turnover.
d. lower levels of inventory.
Ans: C LO 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

AICPA BB: Global AICPA FC: Reporting
43. Inventory reported on the balance sheet of a manufacturing company consists of:
a. raw materials and the cost of labor to convert the raw materials to finished products.
b. raw materials, the cost of labor to convert the raw materials, and an allocated portion
of manufacturing overhead cost.
c. the cost of the raw materials used.
d. raw materials, the cost of labor to convert the raw materials, and all major corporate
overhead costs.

44. The LIFO conformity rule requires a company that uses:

a. the LIFO assumption for computing cost of goods sold on its tax return to also use
the LIFO assumption in preparing its financial statements.
b. any inventory cost assumption to use the LIFO cost assumption for tax purposes.
c. the LIFO assumption for computing cost of goods sold on its financial statements to
also use LIFO on its tax return.
d. the LIFO assumption to avoid paying taxes on inventory profits.
Ans: A LO 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic

45. During a period of rising prices and inventories, a company whose current ratio is
dangerously close to the minimum specified by agreement with a major creditor would
prefer which cost flow assumption?
a. FIFO
b. LIFO
c. Average
d. The company would be indifferent as to which cost flow assumption is adopted.

46. Selling more inventory than was purchased during the current period may often cause
old, smaller costs that were carried as part of the company's beginning inventory, to be
moved to the income statement and reported as cost of goods sold. This is called:
a. the LIFO conformity rule.
b. LIFO liquidation.
c. the LIFO reserve rule.
d. lower-of-cost-or-market accounting.
Ans: B LO 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

47. During a period of rising prices and inventories, a company whose debt/equity ratio is
dangerously close to the minimum specified by agreement with a major creditor would
prefer which cost flow assumption?
a. FIFO
b. LIFO
c. Average

48. During a period of changing inventory prices, which of the following is not immediately
sensitive to the particular cost flow assumption adopted?
a. Net income
b. Current ratio
c. Gross profit
d. Quick ratio

49. Under the lower-of-cost-or-market rule, market is:

a. the selling price of inventory items.
b. the original cost paid for inventory.
c. used to value inventory if it is less than its recorded cost.
d. the amount of cash the company expects to collect from the sale of an inventory
item.

50. Which of the following policies would increase a firm's current inventory turnover ratio?
a. Reduction of the average inventory that supports a constant amount of sales
b. An decrease in the units of inventory sold while holding average inventory constant
c. Increase of inventory by adopting a Just-in-Time production schedule
d. Accelerating purchases of inventory to the current year

51. If the market value of inventory is greater than its cost, then the application of the lower-
of-cost-or-market rule would:
a. decrease both the current ratio and net income.
b. decrease the current ratio but not change net income.
c. not change the current ratio but decrease net income.
d. change neither the current ratio nor net income.

52. During a period of rising prices and inventories, which method causes cash flows to be
stronger?
a. FIFO
b. LIFO
c. Average

53. Which of the following should not be included in inventory cost for a car dealership?
a. The costs of transporting the cars from the factory to the dealership
b. Cost of new car preparation for customers
c. The salary and commission of the salesman who sells the vehicle
d. The cost of adding a CD player to the vehicles before the vehicle is offered for sale
Ans: C LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

54. If the market value of inventory is less than its cost, then application of the lower-of-cost-
or-market rule would:
a. increase earnings and decrease the current ratio.
b. decrease earnings and increase the current ratio.
c. decrease earnings and decrease the current ratio.
d. cause no change to earnings or the current ratio.
Ans: C LO 5 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

55. What is the impact on the financial statements of an overstatement of ending inventory?
a. Next year’s ending inventory will be overstated.
b. Next year’s net income will be overstated.
c. Current year’s net income will be overstated.
d. Next year’s ending inventory will be understated.
Ans: C LO 1 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

56. The following information comes from the annual reports of Devin Designs.
2017 2016 2015
Beginning inventory ? ? 2,250
Purchases 12,652 ? ?
Goods available for sale ? ? 12,899
Ending inventory ? 2,662 ?
Cost of goods sold 12,213 10,908 10,490
What is the Purchases amount for 2015?

a. $4,713
b. $2,397
c. $81
d. $10,649
Solution: $12,899 - $2,250 = $10,649

2017 2016 2015
What is the ending inventory amount for 2015?

a. $4,713
b. $2,409
c. $81
d. $10,583
Solution: $12,899 - $10,490 = $2,409

2017 2016 2015
What is the beginning inventory amount for 2016?

a. $2,409
b. $13,570
c. $10,502
d. $8,246
Solution: $12,899 - $10,490 = $2,409

2017 2016 2015
What is the amount of purchases for 2016?

a. $8,246
b. $11,161
c. $13,570
d. $10,643
Solution: $10,908 + $2,662 = $13,570. $13,570 - $2,409 = $11,161.

2017 2016 2015
What is the amount of goods available for sale for 2016?

a. $8,246
b. $11,173
c. $13,570
d. $10,643
Solution: $10,908 + $2,662 = $13,570

2017 2016 2015
What is the beginning inventory amount for 2017?

a. $439
b. $8,246
c. $10,908
d. $2,662

2017 2016 2015
What is the amount of goods available for sale for 2017?

a. $11,347
b. $15,314
c. $13,957
d. $24,865
Solution: $2,662 + $12,652 = $15,314

2017 2016 2015
What is the ending inventory amount for 2017?

a. $24,865
b. $3,101
c. $2,223
d. $15,314
Solution: $15,314 - $12,213 = $3,101

64. Forrest’s Crab House purchased Florida stone crab on account on November 10, 2017,
for a gross price of $87,000. Forrest also purchased farm-raised catfish on account on
November 11, 2017 for a gross price of $25,000. Forrest paid for the first purchase on
November 19, 2017, and for the second purchase on November 30. If he uses the
perpetual inventory method, which of the following journal entries would Forrest make for
November 30?
a. Inventory 25,000
Accounts Payable 25,000
b. Accounts Payable 25,000
Cash 25,000
c. Accounts Payable 25,000
Cash 24,500
Inventory 500
d. Accounts Payable 24,500
Cash 24,500
Ans: B LO 1 BT: AP, AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic

65. Gump Supplies has the following information:

Beginning inventory $39,000
Inventory purchases 92,000
Transportation-in 11,300
An inventory count taken at year end indicates that inventory with a cost of $56,000 is on
hand as of December 31, 2017. Assume that inventory purchases and transportation-in
are both reflected in the inventory account, which shows an ending balance of $59,000.
What is the amount of the cost of goods sold?
a. $123,300
b. $83,300
c. $60,700
d. $100,700
Solution: With the perpetual method, the balance in the Cost of Goods Sold
account is perpetually updated for sales of inventory, as is the balance in the Inventory
account for sales and acquisitions of inventory. This implies that the balance in Cost of
Goods Sold should correspond to a balance in the Inventory account of $59,000, and
that no entry is necessary at the end of the year to record Cost of Goods Sold.
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold

$59,000 = $39,000 + ($92,000 + $11,300) – COGS
Cost of Goods Sold = $83,300

66. Gump Supplies has the following information:

Beginning inventory $39,000
Inventory purchases 92,000
Transportation-in 11,300
An inventory count taken at year end indicates that inventory with a cost of $56,000 is on
hand as of December 31, 2017. Assume that inventory purchases and transportation-in
are both reflected in the inventory account, which shows an ending balance of $59,000.
Which of the following would be the best adjusting journal entry to make at the end of the
period with respect to this information?
a. Inventory Loss 3,000
Inventory 3,000
b. Inventory 3,000
Inventory Gain 3,000
c. Inventory 3,000
Purchases 3,000
d. Cost of Goods Sold 3,000
Sales 3,000
Solution: Since the physical count indicates that Gump has $3,000 less inventory
than is recorded in its Inventory account, the following adjusting entry is necessary at the
end of the year.
Inventory Loss (E, –SE)..................................................... 3,000

Inventory (–A) ......................................................... 3,000
Ans: A LO 3 BT: AP, AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic

67. Dakota Industries has two items in inventory as of December 31, 2017. Each item was
purchased for $52. Company management chose to write down Item #1 to $39, which
at year-end was assessed to be its market value. Management did not write down Item
#2 because its market value was estimated to be greater than $52. During 2017, each
item was sold for $63 cash.
The journal entry for the write down of Item #1 would include which of the following?
a. Inventory Loss .................................................................. 24
Inventory ............................................................ 24
b. Inventory ......................................................................... 13
Inventory Loss ..................................................... 13
c. Inventory Loss .................................................................. 13
Inventory ............................................................ 13
d. Inventory ......................................................................... 24
Inventory Loss ..................................................... 24
Ans: C LO 5 BT: AP, AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic

68. Dakota Industries has two items in inventory as of December 31, 2015. Each item was
purchased for $52. Company management chose to write down Item #1 to $39, which
at year-end was assessed to be its market value. Management did not write down Item
#2 because its market value was estimated to be greater than $52. During 2016, each
item was sold for $63 cash.
If Dakota uses the perpetual inventory method, which of the following would be included
in the entry or entries to record the sale of Item #1?
a. A debit to Sales for $63.
b. A credit to Inventory for $52.
c. A debit to Cost of Goods Sold for $39.
d. A credit to Cost of Goods Sold for $52.
Ans: C LO 3, 5 BT: AP, AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic

69. Grey Manufacturing had the following transaction:

• Grey received an order to sell inventory with a cost of $50,000, and debited
Accounts Receivable and credited Sales. The goods were shipped to the
customer on December 31, 2017, and received on January 2, 2018.
If the terms of the sale were FOB shipping point and Grey included all these items in its
ending inventory of 12/31/17, which of the following is the best statements regarding this
treatment?
a. Grey made no mistake and rightfully included the items in its inventory until January
2, 2018.
b. Grey made a mistake and wrongly understated ending inventory.
c. Grey made a mistake and wrongly understated Cost of Goods Sold.
d. Grey made a mistake and wrongly understated Retained Earnings.
Ans: C LO 2 BT: AP Difficulty: Difficult TOT: 2 min. AACSB: Analytic

70. Grey Manufacturing had the following transaction:

• Grey ordered $67,000 of inventory on December 30, 2017. The inventory
was shipped on December 31, 2017, with the terms FOB destination. Grey
received the inventory on January 3, 2018.
If Grey included all these items in it ending inventory of 12/31/17, which of the following
is the best statement regarding this treatment?
a. Grey made no mistake and rightfully included the items in its ending inventory for
12/31/17.
b. Grey made a mistake and wrongly overstated ending Inventory.
c. Grey made a mistake and wrongly overstated Cost of Goods Sold.
d. Grey made a mistake and wrongly overstated Retained Earnings.
Ans: B LO 1 BT: AP Difficulty: Difficult TOT: 2 min. AACSB: Analytic

MATCHING QUESTIONS
1. For each cost numbered 1 through 8 below, identify which accounting treatment (a
through c) would most likely be used in accounting for the cost. You may use each letter
more than once or not at all.
Users
a. Added to cost of inventory
b. Deducted from cost of inventory
c. Not part of cost of inventory
1. Cash price of goods purchased for resale
2. Transportation cost of goods shipped to customers
3. Transportation cost of goods shipped from suppliers FOB shipping point
4. Return of inventory to supplier
5. Transportation cost of goods being shipped to consignee
6. Assembly costs of products which will be sold to customers
7. Insurance cost paid while inventory is in transit from suppliers
8. Excise, sales, use, value added, and other fees and taxes paid on the purchase of inventory
Solution:
1. a 5. a
2. c 6. a
3. a 7. a
4. b 8. a
LO 1 BT: K Difficulty: Moderate TOT: 3 min. AACSB: Analytic
2. For each item listed in 1 through 4, place the letter of the accounting effect (a through e)
in the space provided. You may use each letter more than once or not at all.
Accounting Effects
a. Current ratio and earnings per share increase.
b. Current ratio and earnings per share are not affected.
c. Current ratio increases and earnings per share decreases.
d. Current ratio decreases and earnings per share increases.
e. Current ratio and earnings per share decrease.
____ 1. During a period of increasing inventory and rising prices, a company decides
to use FIFO instead of LIFO.
____ 2. During a period of increasing inventory and rising prices, a company decides
to use Average instead of FIFO.
____ 3. During a period of static prices, a company decides to use FIFO instead of
LIFO.
____ 4. A company applies lower-of-cost-or-market for valuing ending inventory when
market price is less than cost.
Solution: 1. a 2. e 3. b 4. e
LO 4 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

3. For each item listed in 1 through 2, place the letter of the accounting effect (a through e)
Accounting Effects
a. Current ratio and earnings per share increase.
b. Current ratio and earnings per share decrease.
c. Current ratio increases and earnings per share decreases.
d. Current ratio decreases and earnings per share increases.
e. Current ratio and earnings per share are not affected.

cost is greater than market price.
____ 2. During an extended period of constant prices, a company uses LIFO instead of
FIFO.
Solution: 1. b 2. e
LO 4, 5 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

4. For each item listed in 1 through 7, place the letter (a through e) of the accounting effect
Accounting Effects
a. Assets and net income increase
b. Assets and net income decrease
c. Assets decrease and net income increases
d. Assets increase and net income decreases
e. Assets and net income are not affected
____ 1. During a period of increasing inventory and rising prices, a company decides to
use FIFO instead of LIFO.
____ 2. During a period of increasing inventory and rising prices, a company decides to
use Average instead of FIFO.
____ 3. During a period of increasing inventory and increasing prices, a company uses
the LIFO method, which creates the largest cost of goods sold.
market price is less than cost.
cost is less than market price.
____ 6. During an extended period of constant prices, a company adopts LIFO instead
of FIFO.
Solution: 1. a 2. b 3. b 4. b 5. e 6. e

SHORT PROBLEMS
1. Bisbee Ltd. has been fraudulently overstating its inventory in order to "pump up" a
lagging income. It started this practice in 2016 and overstated the 2016 income by
$9,000. By what amount will they have to overstate December 31, 2017 inventory in
order to overstate 2017 income by $14,000?
Solution: ($9,000) – $14,000 = $23,000
LO 1,3 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic

Use the information that follows concerning Bradley Corporation to answer problems 2-
5.
Bradley Corporation began business on January 1. During January, Bradley used the
periodic method and reported the following:
January 1 purchase: 100 units @ $10 = $1,000
January 10 purchase: 150 units @ $14 = $2,100
January sales: 200 units
2. Determine the amount of inventory to report on Bradley’s balance sheet at January 31

under the FIFO cost flow assumption.
Solution: 50 x $14 = $700

3. Determine the amount of inventory to report on Bradley’s balance sheet at January 31

under the LIFO cost flow assumption.
Solution: 50 x $10 = $500

4. Determine the amount of the inventory valuation on January 31 under the Average cost
flow assumption.
Solution: [(100 x $10) + (150 x $14)]/250 = $12.40 per unit

50 x $12.40 = $620

5. Determine the amount of cost of goods sold under the FIFO cost flow assumption for the
month of January.
Solution: (100 x $10) + (100 x $14) = $2,400

6. Warren Trading pays for its inventory purchases with cash. Beginning inventory is
$3,000, purchases were $19,000, and cost of goods sold is $18,000. Determine the cost
of Warren’s ending inventory.
Solution: $3,000 + $19,000 – $18,000 = $4,000

Use the information that follows concerning Cinci Corporation to answer problems 7 and 8.
Cinci Company began business on March 1. During March, Cinci made the following
purchases.
March 1: 100 units @ $8 $ 800
March 6: 200 units @ $10 2,000
March sales: 240 units
7. How much will Cinci report as cost of goods sold using LIFO during March?
Solution: (200 x $10) + (40 x $8) = $2,320

8. Calculate cost of goods sold during March under the Average cost flow assumption.
Solution: $2,800/300 = $9.33 per unit; $9.33 x 240 = $2,240

9. The management of Dayton Ltd. erroneously understated its ending inventory during
2016 by $2,000. Using the information below and assuming there are no distributions of
retained earnings: (1) present a brief analysis with the accurate numbers and the
numbers in error and (2) explain whether retained earnings would be overstated,
understated, or be indifferent to the error at the end of 2017.
2016 Sales: $60,000

2016 Purchases: $50,000
2016 Cost of Goods Sold (before effect of inventory error) $20,000
2017 Sales: $210,000
2017 Purchases: $60,000
2017 Cost of Goods Sold (based on error numbers): $68,000
Solution:
(1)
If Accurate With 2016 Error

2016
Sales $60,000 $60,000
Cost of Goods Sold 20,000 22,000
Net Income $40,000 $38,000
2017
Sales $210,000 $210,000
Cost of Goods Sold 70,000 68,000
Net Income $140,000 $142,000
(2) Since errors in inventory misstate net income in the subsequent period by an equal
dollar amount in the opposite direction, retained earnings should be correctly stated
at the end of 2017, if no further errors occur.
Accurate Incomes = $40,000 + $140,000 = $180,000 Retained earnings

Incomes associated with error = $38,000 + $142,000 = $180,000 Retained earnings

10. Yale Co. has valued its beginning and ending inventories at $4,000 and $7,000,
respectively, during a period where cost of goods sold was $22,000. An auditor found an
error in the valuation of the ending inventory and insisted that it be restated to $6,000.
Calculate the adjusted cost of goods sold resulting from the inventory restatement.
Solution: $22,000 + $1,000 = $23,000

11. Summers Company began business on August 1, 2017, and uses the periodic inventory
method. During August, Summers made the following purchases:
August 3 100 units @ $10 $1,000
August 21 300 units @ $20 $6,000
Other information provided:
August sales 350 units at $50 each
August expenses excluding cost of goods sold $7,200
August 31 current assets excluding inventory $34,000
August 31 current liabilities $26,000
Calculate Summers’ August 31 ending inventory under the FIFO and LIFO cost flow
assumptions.
Solution:
FIFO = 50 x $20 = $1,000
LIFO = 50 x $10 = $500

12. Yogi Company began operations on July 1. Each unit is sold for $80. Under the periodic
LIFO method of inventory, Yogi reported the following:
July 3 Purchased 60 units @ $50 $3,000
July 14 Purchased 40 units @ $60 2,400
Cost of goods available $5,400
July 31 Inventory (10 @ $50) 500
Cost of goods sold $4,900
Complete the following table for Yogi for July using the FIFO cost flow assumption
instead of LIFO.
Sales revenue . . . . . . . . . . . . . . . . . _____________________
Cost of goods sold . . . . . . . . . . . . . ._____________________
Gross profit . . . . . . . . . . . . . . . . . . . _____________________
Solution:
Sales revenue = $80 X 90 = $7,200
Cost of goods sold = (60 x $50) + (30 x $60) = $4,800
Gross profit = $7,200 – $4,800 = $2,400
LO 4 BT: AN Difficulty: Difficult TOT: 5 min. AACSB: Analytic

13. A firm fraudulently overstated its December 31, 2016 and 2017 inventories by $4,000
and $7,000, respectively. What is the amount and direction of 2016 and 2017
misstatements of cost of goods sold which results from these inventory overstatements?
Solution:
2016 cost of goods sold is understated by $4,000.
2017 cost of goods sold is understated by $3,000.

Use the information that follows concerning Yarley’s Gift Store to answer problems 14-17.
Grandma’s Gift Store uses the periodic inventory method. nventory and purchase
information for July is as follows:
July 1 Beginning inventory 500 @ $4
July 10 Purchase 800 @ $5
July 31 Ending inventory 300
14. Grandma’s Gift Store uses the FIFO cost flow assumption. Calculate its cost of goods
sold for the month of July and its ending inventory at July 31.
Solution:
Ending inventory = 300 x $5 = $1,500

15. Grandma’s Gift Store uses the LIFO cost flow assumption. Calculate its cost of goods
sold for July and its ending inventory at July 31.
Solution:
Ending inventory = 300 x $4 = $1,200

16. Grandma’s Gift Store uses the Average cost flow assumption. Calculate its cost of goods
sold for July and its inventory at July 31. Round average cost per unit to 3 decimal
places.
Solution:
[(500 X $4) + (800 X $5)] / 1,300 = $4.615
Cost of goods sold = $4.615 x 1,000 = $4,615
Ending inventory = $4.615 x 300 = $1,385

17. Ignoring taxes, by what amount would Grandma’s working capital on July 31 under FIFO
exceed working capital using LIFO?
Solution: ($5 x 300) – ($4 x 300) = $300

Use the information that follows concerning Ruby Company to answer problems 18 through 20.
Ruby Company sells office supplies and uses the periodic system. Below is a list of
purchases and sales for the month of January:
Date Inventory Balances Purchases
January 1 Beginning inventory 10 @ $6
January 4 Purchase 40 @ $7
January 18 Purchase 40 @ $8
January 31 Ending inventory 20 units
18. Ruby uses the FIFO cost flow assumption. Calculate its January cost of goods sold.
Solution: (10 x $6) + (40 x $7) + (20 x $8) = $500

19. Ruby uses the LIFO cost flow assumption. Calculate its January cost of goods sold.
Solution: (40 x $8) + (30 x $7) = $530

20. Ruby uses the Average cost flow assumption. Calculate its January cost of goods sold.
Solution: [(10 x $6) + (40 x $7) + (40 x $8)]/90 = $7.33; 70 x $7.33 = $513
LO 4 BT: K Difficulty: Moderate TOT: 3 min. AACSB: Analytic

21. Toyz’s Retail Store sold $900 of merchandise to Ebony Inc. on April 3, terms. On April 8,
Ebony returned $200 of the merchandise that was defective. The original merchandise
sold cost Toyz $600, but of this amount, $70 was returned. Toyz received payment from
Ebony on April 10. What amount of sales and cost of goods sold should Toyz record for
these transactions?
Solution: Sales = $900 – $200 = $700

Cost of goods sold = $600 - $70 = $530

Use the information that follows concerning Edward Company to answer problems 22 and 23.
Edward Company began business on January 1 and uses the periodic system. During
January, Edward made the following purchases:
January 3: 100 units @ $30 $3,000
January 21: 400 units @ $20 $8,000
January sales: 320 units @ $40 $12,800
Other information:
January expenses excluding cost of goods sold $ 800
January 31 current assets excluding inventory 11,000
January 31 current liabilities 6,000
Number of shares of common stock 300
22. Calculate Edward’s January earnings per share under the FIFO and LIFO cost flow
assumptions.
Solution: FIFO net income: $12,800 − [(100 x $30) + (220 x $20)] − $800 = $4,600
LIFO net income: $12,800 − [320 x $20] − $800 = $5,600
FIFO EPS: $4,600/300 = $15.33 per share
LIFO EPS: $5,600/300 = $18.67 per share

23. Calculate Edward’s January current ratio under the FIFO and LIFO cost flow
assumptions.
Solution: FIFO: ($11,000 + $3,600)/$6,000 = 2.43; LIFO: ($11,000 + $4,600)/$6,000 = 2.60

24. Nokia Inc. reported beginning inventory of $90,000, ending inventory of $23,000,
purchases of $128,000, purchase returns of $2,000, and transportation-in of $3,000.
Calculate cost of goods sold.
Solution: $90,000 + $128,000 – $2,000 + $3,000 – $23,000 = $196,000
LO 1, 3 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic

25. Ramiro Co. has valued its beginning and ending inventories at $4,000 and $5,000,
respectively, during a period where purchases totaled $150,000. An auditor found errors
in the ending inventory valuation and insisted that it be restated to $6,000. Calculate the
adjusted cost of goods sold resulting from the inventory restatement.
Solution: [$4,000 + $150,000 – $5,000] – $1,000 = $148,000

26. Morrie Produce began operations on July 1. Below is its income statement for the month
of July and the current portion of its balance sheet dated July 31.
Sales revenue $45,000
Cost of goods sold (Note 1) 12,000
Gross profit 33,000
Operating expenses 4,700
Net income $28,300
Current assets:
Cash $8,000
Accounts receivable 4,000
Inventory 1,200
Total current assets $13,200
Current liabilities:
Accounts payable $ 9,000
Notes payable 4,000
Total current liabilities $13,000
Note 1: Morrie uses the periodic LIFO method of inventory valuation.

July 1 Purchased 80 units @ $30 $ 2,400
July 17 Purchased 180 units @ $60 10,800
Cost of goods available 13,200
July 31 Inventory (40 @ $30) 1,200
Cost of goods sold $12,000
Complete the following income statement and current portion of the balance sheet for
Morrie for July using the FIFO cost flow assumption instead of LIFO.
Sales revenue . . . . . . . . . . . . . . . . . _____________________
Cost of goods sold . . . . . . . . . . . . . ._____________________
Gross profit . . . . . . . . . . . . . . . . . . . _____________________
Operating expenses. . . . . . . . . . . . . _____________________
Net income. . . . . . . . . . . . . . . . . . . . _____________________
Current assets:
Inventory. . . . . . . . . . . . . . . . . . ._____________________
Solution:
Sales revenue $45,000
Cost of goods sold 10,800
Gross profit 34,200
Operating expenses 4,700
Net income $29,500
Inventory (40 x $60) $ 2,400

27. Mamma’s Cafe assigned the following costs to inventory on December 31:
Cash purchase costs $6,000
Commissions paid to Mamma’s sales staff 230
Transportation-in costs 310
Cell phone charges for Mamma’s’ CEO 400
Handling cost associated with unloading the inventory 150
Labor and overhead costs attributable to repackaging inventory 280
Total cost $7,370
Current net income $24,000
Determine the correct December 31 inventory and recalculate current net income that is
appropriate under generally accepted accounting principles. Justify your new valuation
of inventory.
Solution: The cost of inventory is the cash or cash equivalent price of the asset
plus all expenditures necessary to get the asset in place and ready for its intended use.
Those expenditures for the inventory include:
Cash price $6,000
Repackaging costs 280
Transportation-in 310
Handling costs 150
Total cost $6,740
The adjusted net income is $24,000 –$230 – $400 = $23,370.

SHORT ESSAY QUESTIONS

1. Please explain the statement that “a LIFO liquidation creates ‘phantom’ income”.
Solution: A LIFO liquidation occurs when the current year’s higher-priced inventory
is all sold off causing penetration (i.e., sale) of the LIFO inventory layers that had
accumulated in prior years. Since the prior year layers had lower costs associated with
them, the cost of goods sold for the goods in by these lower-cost layers is less than the
current cost of inventory. The sale of inventory having these artificially low costs creates
an artificially high gross profit. This extra gross profit is what is referred to by some as
“phantom” income.
LO 4 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Communication, Reflective

Thinking AICPA BB: Critical Thinking AICPA FC: Reporting
2. Identify the options a manager has in measuring the cost of inventory as it flows through
the accounting system.
Solution: Four cost flow options exist: specific identification, Average, FIFO, and
LIFO. The inventory cost of individual items sold is moved from the balance sheet to the
income statement at the point-of-sale based on one of these assumptions.
LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: Communication, Analytic

3. What effect does management's perception of the ‘capital market’ have on selecting an
inventory costing method?
Solution: Investors in the capital market prefer companies with higher net income
amounts and larger amounts of assets. In periods of rising prices, FIFO reports a lower
cost of goods sold, which results in higher net income, and leaves the cost of the new or
more expensive inventory on the balance sheet. However, the validity of this reasoning
is open to question. Some research studies suggest that the stock market “looks
through” a company’s accounting methods and values the company on the basis of
underlying cash flows. Since using LIFO usually saves taxes, these studies suggest that
LIFO companies are more highly valued by the market than the FIFO companies.
However, evidence is mixed and conclusions are still tentative.
LO 4 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Communication, Reflective

4. If an entity overstates its ending inventory for the current year, what are the effects on
assets, cost of goods sold, retained earnings, and total stockholders’ equity for the
current year?
Solution: If ending inventory is overstated at the end of the year, assets will be
overstated and cost of goods sold will be understated. When this occurs, expenses are
less than expected, which causes net income to be overstated. When net income is
overstated, the amount closed to retained earnings at the end of the accounting period is
more than what it should be. This creates an overstatement of retained earnings. Since
retained earnings is part of stockholders’ equity, this amount also will be overstated.
LO 1 BT: AP Difficulty: Moderate TOT: 3 min. AACSB: Communication, Analytic

5. During a period of rapidly rising inventory prices and a significant increase in inventory, a
financial analyst made the following statement:
"I rank a company's earning power by using earnings per share. You do not need to be a
rocket scientist and know all that accounting mumbo-jumbo in order to compare earnings
per share of two companies to obtain a ranking of their earnings power."
Respond to the statement made by the financial analyst concerning the implications of
choosing an inventory valuation method.
Solution: During a period of significantly increasing prices and inventory, the choice
of FIFO or LIFO inventory valuation methods can significantly influence measured
current assets and income for corporations that carry significant inventory and whose
cost of goods sold is a major expense. Under these conditions, the firm that uses FIFO
will have a greater income number than that of the firm that uses LIFO. Thus, when their
earnings per share are compared, adjustments for this difference should be made.
These adjustments may involve an approximation of the difference in the EPS figure
caused by the use of LIFO or FIFO. As a minimum, the user should realize the direction
of the "bias" caused by the differing inventory valuation methods and digest the EPS
numbers accordingly. However, if inventory and cost of goods sold are not a significant
component of the firm's financial statements, or prices do not change significantly, then
perhaps the financial analyst's position would be justified.
LO 4 BT: AP Difficulty: Difficult TOT: 3 min. AACSB: Communication, Analytic

6. How do inventories of manufacturing companies differ from inventories of merchandising

companies?
Solution: Manufacturing companies have three inventories: raw materials, work in

process, and finished goods. Three costs make up these inventories: direct materials,
labor, and manufacturing overhead costs. A merchandising company has only one
inventory account—often called merchandise inventory. This account is used for goods
that are ready to sell.
LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: Communication, Analytic

7. Explain the concept of hidden reserves as it applies to the lower-of-cost-or-market rule.
Solution: The lower-of-cost-or-market rule recognizes price decreases immediately,

but price increases are not recognized until the inventory is sold in an actual transaction.
While this treatment is conservative, it is not consistent. The downward adjustment of
inventory creates a 'hidden reserve' that is easily manipulated by managers. When
management recognizes a price decrease in the current period, i.e., a loss, which is
followed by a price increase in a subsequent period, the inventory can be sold for a
larger profit. By reporting a larger profit in a different accounting period, management
has manipulated income by deferring the gain.
LO 5 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Communication, Analytic

8. The chief investment officer of a large mutual fund made the following statement:
"I prefer to use the debt/equity ratio instead of the debt/asset ratio because the latter
ratio is sensitive to the measure of inventory where accountants can choose LIFO, FIFO,
or weighted Average. Therefore, I use the debt/equity ratio so that I do not have to worry
about which inventory valuation method the accountant used when I run comparisons
between companies."
Comment on the preceding statement.
Solution: Although it is true that the particular inventory valuation method does
influence the measure of assets and, therefore, the debt/asset ratio, it is not true that the
debt/equity ratio is unaffected. If the choice of an inventory valuation method results in
greater (smaller) measure of assets, it measures a greater (smaller) income. Thus, the
amount of retained earnings and stockholders' equity is influenced by the inventory
valuation method used and by the same amount that measured assets are affected. For
example, if the application of FIFO measures assets $10,000 more than that under
LIFO, then FIFO stockholders' equity will also be $10,000 greater than that resulting
from the use of LIFO.
LO 4 BT: AP Difficulty: Difficult TOT: 4 min. AACSB: Communication, Reflective

9. Why is the lower-of-cost-or-market rule necessary in accounting?
Solution: When the market value of inventory, its replacement cost, is lower than
the original cost of the inventory, the inventory amount reported on the balance sheet will
be overstated. Conservatism justifies reducing the inventory value on the balance sheet
to the lower of the two amounts.

10. After studying a financial accounting text, your roommate asserts that what is interesting
about accountants is that they always measure what actually happens. Having studied
inventory, you disagree with your roommate's assertion. Present an argument refuting
your roommate's position that accountants measure what actually happens in context of
knowledge acquired after reading the chapter entitled "Merchandise Inventory."
Solution: Accountants measure cost of goods sold and inventory by applying a cost
flow assumption. Accountants may choose to represent inventory cost flows as First-In,
First-Out (FIFO), Last-In, First-Out (LIFO), or a weighted Average. The choice of a cost
flow assumption is independent of the actual physical flow of inventory through the
business. This is why the assumptions are referred to as cost flow instead of physical
flow assumptions. The only time that accountants respect the actual flow of inventory
through the business is when they use specific identification to value inventory.
Therefore, with respect to inventory, accountants do not measure what actually
happens.

11. If an entity understates its ending inventory for the current period, why does the effect on
cost of goods sold and inventory carry over to the next year?
Solution: If ending inventory is understated at the end of the year, cost of goods
sold will be overstated for that year. Ending inventory from the first year then becomes
the beginning inventory of the second year. This creates an equal, but opposite effect on
financial statement items during the second accounting year.

12. Explain the relationship between the valuation of inventory and income reporting.
Solution: Inventory costs are capitalized on the balance sheet as assets because
they provide future economic benefits. The dollar amount at which the inventory is
carried on the books is the valuation of the inventory. Most often, original cost is the
valuation, but in some cases, the lower-of-cost-or-market rule applies. When goods are
sold, the accountant must measure cost of goods sold and ending inventory by applying
a cost flow assumption. Cost flow assumptions include FIFO, LIFO, Average, and
specific identification.
LO 2, 4, 5 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Communication, Analytic

IFRS QUESTIONS
1. Which of the following inventory cost flow assumptions is not allowed under IFRS?
A. FIFO
B. Average Cost
C. LIFO
D. FIFO and LIFO
Ans: C LO 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic, Communication

2. When applying the lower-of-cost-or-market rule, IFRS uses the market value which is
A. Normally the realizable value or the amount at which the inventory could be sold
B. Normally the replacement cost or the cost of replacing the inventory
C. Normally the hypothetical future value
D. IFRS does not use the lower-of-cost or market rule.
Ans: A LO 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic, Communication


Financial Accounting in An Economic Context 10th Edition Pratt Test Bank

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Financial Accounting in An Economic Context 10th Edition Pratt Test Bank

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Financial Accounting in an Economic

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MULTIPLE CHOICE QUESTIONS

Ans: C LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic

Solution: 2016 overstatement = $6,000 - $3,000 = $3,000

Ans: A LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: A LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

5. If a company desires to increase its inventory, then it should:

Ans: B LO 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: A LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

7. Washington Co. mistakenly omitted $4,000 of merchandise from its inventory on

Ans: B LO 1 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

Solution: (200 X $10) + $40 + $30

Ans: D LO 2 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

9. A company deliberately and inappropriately included interest costs in its December 31

Ans: B LO 2 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: 2017 understatement = -$700 - $200 = - $900

Ans: C LO 1 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

Solution: $14,000 + $2,000 − $4,000 = $12,000

Ans: D LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Solution: Sales = 20 X $8 = $160; CGS = 20 X $4 = $80

Ans: C LO 3 BT: AP Difficulty: Easy TOT: 1 min. AACSB: Analytic

Solution: CGS = $19,500 + $26,000 = $45,500

Ans: A LO 3, 4 BT: AP Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: $400 + $15 = $415

Ans: C LO 2 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: ($100 + $60) / 100 = $1.60

Ans: C LO 2 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: $7,000 + $15,000 - $9,000 = $13,000

Ans: D LO 1 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: ($30,000 + $4,000 - $25,000) - $6,000 = $3,000

Ans: C LO 3 BT: AN Difficulty: Difficult TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: C LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: A LO 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: A LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

30. An excessively low inventory turnover ratio may reveal that:

Ans: B LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Solution: ($10,000 +$20,000)/2 = $15,000; $45,000/$15,000 = 3.0

Ans: B LO 6 BT: AN Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 3 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

35. Items should be included in the company’s inventory if they are:

Ans: C LO 2 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: B LO 2 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: D LO 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic

Ans: D LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: B LO 2 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

40. Specific identification is a method of accounting for inventory:

Ans: C LO 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: C LO 4 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic

Ans: C LO 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic